Archive for the ‘Construction’ Category

A seemingly counter-intuitive process has just come a bit closer to being the final law of Canada.

We often act for clients who are asserting or defending claims against multiple parties.  These can arise in a myriad of situations, for instance:

• claims by purchasers of land may target the buyer’s lawyer and realtor as well as the vendor
• developers’ construction claims may assert wrongdoing by contractors, subcontractors, engineers and architects
• actions alleging securities misrepresentations may target the issuer, the issuer’s principals, and the underwriters

In most cases the various defendants will have very different legal positions and, just as importantly, the prospects of recovery against deep-pocketed or insured defendants will be drastically different than against others.

It only makes sense, therefore, that settlements between some, but not all, parties to the dispute should be explored by all parties.    For instance:

• a defendant whose potential liability is minimal may wish to pay a relatively small sum early  to avoid being entangled in the morass of a lengthy dispute;
• a plaintiff may find it advantageous to collect some money from one defendant to fund its claims against the others;
• even where multiple defendants have similar prospects of liability, differences in personality or in the availability of funding may dictate completely different responses to the litigation.

Recently, the Ontario Court of Appeal ruled that settlements involving some but not all parties – sometimes called “Mary Carter agreements” – must be immediately disclosed to level the playing field between the remaining parties: Aecon Buildings, a Division of Aecon Construction Group Inc. v. Stephenson Engineering Limited (2010 ONCA 898, 328 D.L.R. (4th) 488)    There has been considerable buzz about this ruling and whether it will be applied in British Columbia.

Arguments in favour of immediate disclosure focus on the notion that a plaintiff shouldn’t recover more than the total amount of its losses and costs (except in rare cases involving punitive damages).  People also insist that if a defendant claims “over” against a third party, that party should know whether the defendant is truly fighting the primary claim or is whether its position is a mere fiction.

Consider, for example, the common scenario where a developer claims its prime contractor provided deficient building and the contractor claims that fault actually originated in misleading architectural plans and/or deficient structural steel of its subcontractor.     Even if – leaving aside the possible architect’s negligence – the owner recognizes the source of the deficient steel, it must claim against the party it has a direct contract with.     The contractor wishing to wash its hands of the dispute may pay a small sum upfront and pass on to the owner any recovery against the subcontractor.

Another scenario is that the owner and contractor may be related parties such that the owner’s shareholders will not, in reality, gain anything unless blame can be passed further down the line to the subcontractors.   In this case, it may be argued that the subcontractor should be entitled to be informed of any “sweetheart deal”.

On the other hand, to encourage settlements and minimize litigation there is a strong argument that disclosure of such settlements to remaining parties should not be required, at least until it is time to enter judgment.   One reason concerns secrecy – the settling defendant will almost always wish to protect its own name through a confidentiality clause; if secrecy cannot be assured it will often not be willing to settle.  Another argument is that commercial parties are best left to settle their own disputes in their own ways, without having the court as a big brother.  There is nothing stopping the remaining parties from asking whether there has been a settlement with some parties, and  at what price.

In my own experience, and in that of other litigators I have spoken with on this matter,  settlements of entire cases often follow after partial settlements are made, even if not yet disclosed.  The more  It follows that partial settlements should be encouraged on whatever terms, so long as there is no deceit or subterfuge involved.

It does not appear that the Supreme Court of Canada shares my view on this.  Today in an interim ruling on the Aecon appeal the court moved a step closer to endorsing the requirement for immediate disclosure: http://scc.lexum.org/en/2011/2011scc33/2011scc33.html .

Once this appeal is finally heard and judgment rendered, we will know whether the immediate disclosure principle applies in BC.  In the meantime, parties wishing to enter into “Mary Carter” settlements must beware.  Plaintiffs in particular must know that if they fail to immediately disclose such a settlement to the remaining parties to the dispute, they may well face a stay of the entire proceedings.   For this reason, confidential partial settlements are not currently part of the landscape in British Columbia.

Tags: multiple defendants, multiple parties, partial settlement

In the preparation of this article, the assistance of articled student Richard Sehmer is gratefully acknowledged. 

You may recall that, on February 12, 2010, the Supreme Court of Canada released its decision in Tercon Construction Ltd. v. British Columbia (Transportation and Highways) 2010 SCC 4 in an attempt to further ensure fairness and balance the interests of owners and tenderers involved in the tendering process. Subsequently, the precedent has not only been applied to cases promoting fairness in the tendering process, as was the case in CMH Construction Ltd. v. Victoria (Town) 2010 NLTD(G) 145, but it has also been more recently applied to fairness in regard to the interpretation of commercial contracts in Strata Plan 226 v. White Rock (City) 2010 BCSC 1358. 

In Tercon the Supreme Court held that an exclusion of liability clause in a request for proposals which barred claims for compensation “as a result of participating” in the tendering process, did not, when properly interpreted, exclude Tercon’s claim for damages. It was also held that by considering a bid from a non-compliant, and thus ineligible bidder, the Province not only acted in a way that breached the express and implied terms of the contract, it did so in a manner that was an affront to the integrity and business efficacy of the tendering process.   In its reasons for judgment,  the Court confirmed its own earlier determination in The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111 that a bid submitted in the tendering process results in a contract (Contract A) between the bidder and the owner, while the awarding in the tendering process results in a separate contract (Contract B). The owner owes a duty of fairness under both contracts, and, post-Tercon, will not easily be able to exclude liability for unfairly accepting an ineligible bid under ‘Contract A’.

In two recent cases, Tercon has been applied to extend contracting parties’ implied contractual duty of fairness in different situations.   On September 22, 2010, in CMH Construction Ltd. v. Victoria (Town), a plaintiff construction company successfully relied on Tercon to argue that the defendant town, in its request for proposals in the tendering process to renovate the town’s municipal center, breached a duty of fairness it owed to the bidders. In complying with a tender call, CMH Construction submitted a bid pursuant to standard bidding techniques. Without notifying CMH, the defendant town re-issued the tender call to other contractors and suppliers in hopes that they would receive a cheaper bid. After this second round of bids, the defendant accepted a lower bid from an alternate construction company. In holding in favour of CMH, the Newfoundland court confirmed the existence of a “Contract A” in the bidding process and, as in Tercon, affirmed a duty of fairness therein.

Five days after CMH Construction was released, Tercon was applied by the British Columbia Supreme Court to a dissimilar factual scenario in Strata Plan 226 v. White Rock (City) . In this case, the court applied Tercon in an effort to promote fairness in the interpretation of a provision in a restrictive covenant on the title of strata lots in a strata plan.   In doing so, the court applied the Tercon analysis that “the key principle of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purpose and commercial context.” In this appeal, the B.C. Supreme Court overturned a previous decision by a Board Chair who did not consider anything beyond the natural meaning of plain and obvious words as written in the relevant clause. This application of Tercon illustrates the judiciary’s willingness to apply the duty of fairness to a broader scope of commercial relationships.

The Tercon decision found a compromise between an owner’s desire to maintain flexibility during the tendering process and a tenderer’s right to a fair process after having spent considerable resources in preparation of a tender. In applying Tercon more generally, the courts will ensure fairness and transparency in not only the tendering process, but in other business transactions.

Tags: duty of fairness, tenders, Tercon Construction

In a case being heard before the B.C. Supreme Court this week, a mortgagee who has discharged its security  is seeking to now assert priority over funds previously posted in court to secure a lien claim.

Background

Section 24 of the Builders Lien Act (“BLA”) provides that a person against whose land a claim for lien has been filed, may apply to court to have the claim of lien canceled by giving sufficient security for the payment of the claim.

In order to complete pending sales of the strata units, the developer in this case brought an application under section 24 seeking to cancel a claim for lien upon posting the required security.  The order was eventually made -  with the consent of the lien claimant – and the claim for lien was discharged.  In the evidence before the court, no mention was made of the mortgagee or of the source of those funds to be posted in court.

Once the claim for lien was canceled from title, the strata unit sales closed and, and despite the fact that the mortgagee’s loan was never fully repaid by the developer, it entirely discharged its security from the each strata lot.  No foreclosure proceedings were commenced.

In due course, the lien claimant commenced proceedings to enforce its claim for lien and for payment out of court of the security that had been posted.  The mortgagee has now brought an application claiming that, although it has completely discharged its security, it is entitled to the funds posted in court in priority to lien claimant.  The mortgagee relies on section 32 of the BLA.

Issue before the court

The court must decide whether a mortgagee can take advantage of section 32 of the BLA to create a security interest for it in funds posted in court to secure a claim for lien.

It is the author’s opinion that a mortgagee has no right to claim an interest in funds posted as security for the claim of lien.  A mortgagee’s security is in the land, and an order under section 24 of the BLA does nothing to interfere with that security; it merely creates a separate fund to secure a lien claimant.  The mortgagee got what it bargained for.

Tags: builder's liens, Construction, development, mortgagee